The biggest news this week was about trade. On Tuesday, the US moved to apply a ten percent tariff to imported Chinese goods worth more than $200 billion. While this was an anti-trade move, the markets reacted in awe because the tariffs were less than the 25% traders were expecting. The decision by Trump came after months of threats about the new tariffs and after the public hearings period ended two weeks ago. In the announcement, the Trump administration said that additional tariffs will be put in place next year if the two countries don’t have a trade deal in place. In response, China announced fresh tariffs worth $60 billion.
On this issue, in an interview, the commerce department secretary said that the Chinese government did not have enough ammunition to counter the US. On a purely trade perspective, his thinking was correct. This is because China imports very little from the US compared to the more than $500 billion that the US imports from China. However, from a strategic perspective, China has a lot of ammunition. For example, China is the biggest holder of US bonds and stocks. If the country announced that it will stop additional purchases or sell the current holdings, the US economy would be significantly affected. In addition, China’s communist regime can announce large boycotts of American firms like Apple that are very popular.
The week started by the huge weather implications in Asia and in the United States. The US had just been hit by Hurricane Florence while Asian countries were hit with the Typhoon Mangkhuk. This led to the massive sell-off in the stocks in Hong Kong. As the week progressed, the impacts of the typhoon reduced and the stocks started to move up. Similarly, as shown below, the Hong Kong dollar rose sharply against the US dollar.
This week, the Salzburg summit happened and was a major blow to Theresa May, who is now fighting to save her Chequers plan. In the informal summit, the EU leaders took turns to ‘rubbish’ the plan, indicating that they will not accept the plan as it stood. Leaders like Donald Tusk and Emmanuel Macron took turns to mock the plan. This happened ahead of the UK’s conservative party’s forum. In the past two weeks, there have been optimism that the two sides will come to an amicable solution to the current disputes. These hopes are now hanging on a balance as May continues to face pressure from the pro-Brexit members of her party.
The Bank of Japan left interest rates unchanged and showed signs that the negative rates will continue to persist. The move by the BOJ was expected but traders were expecting a change of language in the statement as the economy improves. On Thursday, Shinzo Abe received the support of his party which will make him the longest-serving Japanese prime minister. The Abenomics economic policies of low interest rates will therefore continue. Yesterday, the Swiss National Bank (SNB) left rates unchanged and pointed that they will remain lower. The bank still believes that the Swiss franc is overvalued against the peer currencies.
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